New York regulators propose regulations for bitcoin, other virtual currencies

ALBANY, N.Y. – State regulators trying to curb money laundering and safeguard investors on Thursday proposed a special set of rules for firms involved in trading and storing virtual currencies.

New York is the first state to propose issuing separate regulations for virtual currencies, demonstrating the importance regulators attach to the fledgling field. New York City is home to several startups dealing in bitcoin, the most popular virtual currency, and some Wall Street firms are edging into the field as well.

Some industry firms vowed to comply. But the Bitcoin Foundation, a nonprofit organization that promotes the currency, questioned whether separate regulations were warranted and suggested operators should instead be integrated into existing financial regulations.

The proposal by the Department of Financial Services would establish a so-called BitLicense.

Merchants and consumers who use the virtual currency solely to buy and sell goods and services wouldn't need the license, but those buying and selling virtual currency as a business would.

Bitcoin and other virtual currencies have been gaining the backing of legitimate investors and mainstream businesses. Earlier this year, Overstock.com became the first major retailer to accept digital money.

Users swap cash for virtual currency using online exchanges, then store it in a wallet program on their computer. The program can transfer payments directly to a merchant who accepts the currency or to private parties anywhere in the world, eliminating transaction fees and the need to provide bank or credit card information.

The currency exchange itBit said it intended to fully comply with regulations and said it applauded New York's "thoughtful and transparent approach." SecondMarket, a Wall Street firm that runs a Bitcoin Investment Trust, said the rules "will help promote further adoption of digital currencies by both consumers and investors alike."

Jim Harper, Washington-based global policy counsel at the Bitcoin Foundation, said some provisions of the regulations would be a heavy burden on bitcoin businesses. For instance, they wouldn't be able to keep their earnings in bitcoin, but have to convert them to regular-currency assets, like Treasury bonds or money-market funds. In addition, the requirement that they collect physical addresses of the parties in all transactions is "generally inconsistent with the way bitcoin works today."

But most importantly, Harper said it's unnecessary to issue licenses specific to a certain technology.

"The preference would be for there not to be a special bitcoin license but simply to integrate bitcoin into financial services," he said.

The proposed rules are scheduled to be published July 23, followed by a 45-day comment period. The regulations would require of licensed companies:

— a background check of all employees and founders with fingerprints submitted to state authorities and the FBI;

The department would prohibit accounts with shell entities that have no physical presence in any country and require notifying customers that virtual currency is not legal tender and not backed by the government.

In March, the U.S. Treasury Department's Financial Crimes Enforcement Network said its requirements for money services applied to virtual currency exchangers and administrators, requiring that exchanges register. Meanwhile, the IRS issued guidance that virtual currency is treated as property for federal tax purposes and is taxable as wages and payments to contractors.

Associated Press writer Peter Svensson in New York contributed to this report.